Loan Modification

Canceling FHA Insurance

By Peter G. Miller

There’s a lot of question regarding when FHA insurance can and cannot be canceled. For instance, MaryAnn writes and says, “I have been paying PMI for seven years and have never once been late on my mortgage. I did notice it dropped $10 a month. I now pay $65/month instead of $75. I have reached the ratio to have it dropped and I do have an FHA loan. I received a letter from Wells Fargo that I have to keep the PMI for the life of the loan. This is not what I was told at signing with a lawyer present.”

Let’s look at this a little closer and see what’s happening.

To start, there is no “PMI” with FHA loans. The term “PMI” stands for “private mortgage insurance.” It’s a form of private-sector mortgage insurance which is used to help borrowers reduce required down payments from 20 percent to 5 percent of the loan amount.

The FHA has what is called a “mortgage insurance premium” or MIP. There is an upfront MIP which is typically equal to 2.25% of the loan amount, and an annual MIP which is usually equal to .55 percent of the outstanding mortgage balance.

Given this background we know that the MIP should decline a touch each month because the outstanding mortgage balance goes down with each monthly payment.

Cancellation

It used to be that mortgage insurance was rarely if ever canceled. This changed with passage of the Homeowners Protection Act of 1998. The HPA basically said that borrowers could stop paying private mortgage insurance (MI) when the original loan balance was reduced 22 percent. There is a calculator borrowers can use at PrivateMI.com.

Okay, what about FHA loans?

Since 2000 the FHA has also had a cancellation policy. According to HUD it goes like this:

“In the past, some FHA borrowers have paid annual mortgage insurance premiums throughout the life of their mortgages. Effective for all loans closed on or after January 1, 2001, FHA?s annual mortgage insurance premiums will be automatically canceled under the following conditions:

___ For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78 percent, provided the mortgagor has paid the annual mortgage insurance premiums for at least five years.

___ For mortgages with terms 15 years and less and with loan to value ratios 90 percent and greater, the annual mortgage insurance premiums will be canceled when the loan to value ratio reaches 78 percent, irrespective of the length of time the mortgagor has paid the annual mortgage premiums.

___ Mortgages with terms 15 years and less and with loan to value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.

So, for MaryAnn, you should see your MIP decline a little each month — and in most cases if you have an FHA loan you should be able to cancel the MIP between five and 15 years into the loan term.

Full post as published by FHA Mortgage Guide on July 12, 2010 (boomark / email).